Friday, June 11, 2010

BP and the special relationship 

Even before the British Petroleum disaster in the Gulf of Mexico, relations between the U.S. and the U.K. had stagnated a bit during the Obama administration. Now, the understandably harsh language that President Obama is directing at BP has alarmed British politicians, as they have watched BP's share price be nearly cut in half, and worry about the effect on the many British pensioners who hold the stock.
The Gulf of Mexico oil spill risked turning into a transatlantic diplomatic rift Thursday after U.S. threats to have BP fork out billions more for the disaster caused a precipitous slide in the blue chip's stock, hurting retirement savings for millions of Britons.

British lawmakers are even pushing Prime Minister David Cameron to get President Obama to tone down his stinging criticism of the oil company, complaining that hostile rhetoric will have severe implications for pensioners with nest eggs in the company.

The share slide has since April almost halved BP's market value to 69 billion pounds ($101 billion), costing it the spot as Britain's biggest company - and some worry it could become a takeover target for upstart firms in Asia. BP said there was no reason for the stock drop, stressing its strong finances.
I do not believe that the welfare of British pensioners is even a secondary or tertiary consideration for President Obama, nor should it be. The important issue, however, of BP's financial future and the extent to which the Obama administration acts for short-term domestic political optics and not the long-term clean-up effort may have a doubly bad effect. BP needs to survive in some form and have robust cash flow from its myriad (and hopefully safely operated) other projects so that it can fund the clean-up effort in the Gulf, which will most likely take a number of years. Using the bully pulpit that results -- intentionally or not -- in beating down the share price to achieve political points may not help BP's ability to pay for the clean-up.

It should be noted that under federal law, BP's direct liability for economic damages is capped at $75 million per incident, according AP's reporting, although Speaker Pelosi wants to do away with the cap, and one can infer that she would like to do so retroactively.

In my view, BP should pay for the clean-up as it has promised, possibly along with some of the contractors involved in the original incident. For it to do so, there should be a clear path for it to survive and be profitable in some form. Seizing U.S. assets willy-nilly, as much as that would make some people feel good, probably doesn't provide sufficient immediate and near-term liquidity (when those assets are re-sold at a steeply discounted value, and the seizure litigation is dealt with) to fund the clean-up. BP and the U.S. government will need to arrive at some sort of comprehensive agreement, probably with BP operating under a consent decree and with set minimum pay-out requirements over time. Quantifying those figures helps everybody, I believe, and has the side effect of providing a degree of cost certainty to the Britons and others who are BP shareholders. There is a long way to go before the situation is calm enough for such an agreement to be reached.
"We don't believe BP has a funding issue," said Evolution Securities analyst Richard Griffith, "but given the overwhelmingly hostile nature of the U.S. government, the company may decide to suspend payments until the wells are capped and the cleanup sufficiently advanced to convince the U.S. that it can afford all the costs as well as pay dividends.

"Unilateral action against BP over its U.S. operations, be it unreasonable or illegal, hangs over BP."

"There is a lot of very irrational and short-term selling going on," said Robert Talbut, the chief investment officer at Royal London Asset Management, a shareholder in BP. But he added that talk of a potential sale of assets or takeover bid - PetroChina Ltd. has been suggested by some as a potential suitor - was not surprising.

"I can understand exactly why someone else would want to buy the BP assets," he said, "because I think they are grossly undervalued at the moment. As a shareholder, it's not something I would welcome."
The unhappy scenario of PetroChina swooping in to gobble up what might be left of BP presents an interesting possibility. A small army of American trial attorneys wants to litigate on behalf of clients who have suffered in many ways because of the spill, and decides to take its case to Beijing (talk about a irresistible force meeting an immovable object). What are the chances that a large Chinese company will make additional payouts to U.S. litigants?

UPDATE: The debate, via Instapundit, in the NYT blog, about whether the USDOJ can tell BP to suspend its dividend so that more cash is available for the clean-up. While the legal backdrop sets the tone for the comprehensive negotiated settlement suggested above, politics and image will be at least as important. If BP wants to survive, as Exxon did after the Valdez, it will have to play ball. A reasonable guess is that BP would volunteer to significantly reduce but not completely eliminate its dividend. Again, killing BP is lose/lose -- the better way to fund the clean up is a high level of payouts over a number of years, with relatively little of it going to lawyers.


By Anonymous vikingTX, at Fri Jun 11, 04:07:00 PM:

The US govt and specifically the Obama administration are up to their (don't talk about my) ears in complicity for the magnitude of the spill. From not burning the oil on the surface, to not getting booms there as protocol demands, to using Environmental impact regulations to keep the sand berms from being built, to not bringing tankers in to capture what oil they could, to using EPA discharge regulations to prevent Costner's Oil Centrifuge scheme to be tried, the Minerals Mgmt and other regulatory agencies have contributed to this mess in ways that make the post-Katrina cleanup look like a smooth and effective operation. When engineering and technical talent was called for, this administration sent lawyers.
To kill BP may be emotionally satisfying to those anti-corporation, anti-oil, anti-capitalists, but it will have far reaching negative consequences to our national well being and security.  

By Anonymous Anonymous, at Fri Jun 11, 04:19:00 PM:

I think punitive/compensatory damages are capped at $75 million, but they're still 100% liable for the cleanup. Does anybody know for sure?  

By Anonymous Blacque Jacques Shellacque, at Fri Jun 11, 04:35:00 PM:

Again, killing BP is lose/lose...

Another consideration is that out here on the west coast, ARCO - owned by BP - consistently has the least expensive gas out of all the major names. One less player in the game means less competition, and likely, higher prices. And the prices for gasoline here in CA are already high enough.  

By Anonymous Ignoramus, at Fri Jun 11, 06:34:00 PM:

VikingTX is spot on.

I'd add that Obama & Co are using the threat of criminal charges to get leverage on a civil settlement, liability caps be damned. They also want to expand damages to include lost pay for oil drillers idled by Obama recent offshore drilling ban. Why don't they cover higher gas prices for low-income motorists, while they're at it.

Hugo Chavez would be proud.  

By Anonymous Anonymous, at Fri Jun 11, 09:04:00 PM:

I play the tinist violin for the tragedy of those unable to prove their loss because they always worked for cash and never paid taxes.  

By Blogger JPMcT, at Sat Jun 12, 12:01:00 AM:

An effective leader would have met with and offered help to a corporation that found itself in this mess. A mess brought on by unreasonable restricitons in the manner and location of oil drilling in coastal waters.

Obama failed so spectacularly and on so many levels with this disaster that one has to wonder whether it was his intention to do so.

Either Obama is a completely incompetent administrator...or...a highly competent Marxist revolutionary.  

By Anonymous Ignoramus, at Sat Jun 12, 02:27:00 PM:

I'm going with B .... "highly competent Marxist revolutionary." Never waste a crisis. Can you say "cap and trade."

You can't make this up. Courtesy of InstaPundit there's an interesting story over here: Another Stumble in the Gulf

As support for declaring a six-month moratorium on Gulf Coast drilling, Interior Secretary Ken Salazar issued a report that claimed support from a panel of seven experts. It turns out, though, that the seven experts never saw the recommendation for a moratorium, and in fact oppose it. Salazar rewrote an earlier report and added his own conclusion without going back to the experts.

The experts say that stopping current drilling is worse. Continuing to drill isn't that risky -- it's when you stop drilling and then shift to "production" that you have Deepwater risk, apparantly. If we stop drilling -- even for six months -- the rigs will get moved to places like Africa, and won't return for a long time, if ever.

I wrote here awhile back that from Day One we should have been on a war footing to use any and all means for Containment. Plugging the Hole was only half of it. One benefit of Deepwater being so far out was that it gave us weeks of lead time. We should have been "booming" like mad, as part of this.

Well it turns out that a company in Maine makes the stuff -- has been jumping up and down for weeks -- but has been ignored. They have miles and miles of it sitting in their warehouse and can make 100,000 feet of it a day. ABC's Jake Tapper has figured this out -- and more. Recall that Tapper very pointedly called out Obama at the lone press conference when Obama claimed that "everything that could be done is being done."

I don't often agree with Rachel Maddow -- but she has integrity. She's been all over booming and understands that the single line booming we've been doing is a useless PR exercise.

I haven't seen MSM report on "fire booming." Deepwater was a foreseeable risk -- as the worst drilling spill ever was also in the Gulf -- but off Mexico -- back in 1979. So pursuant to legislation, we created a plan in 1994 to use special booms to collect the oil near the drilling site and burn it. We even taxed the drillers to fund the plan. And then the government never bought the FUCKING equipment. Experts say fire booming could have been as much as 90% effective.


The Brits are ready to go to war over BP. Seems they don't like Obama no more. Here's an insightful comment in the Daily Telegraph:

“The rest of the world is fed up with the parasitic attitude of the U.S.,” ... I used to be a supporter of the U.S., but not anymore. You want the oil? You clean up the mess.”

BP is hosed as a company. Wouldn't it be great if they got bought by the Chinese for cents on the dollar.

I can't wait for November. No prisoners !  

By Blogger Ray, at Sat Jun 12, 04:35:00 PM:

Um. Lawyers, wouldn't retroactively removing the cap for this particular case amount to a bill of attainder?  

By Anonymous Anonymous, at Sat Jun 12, 06:59:00 PM:

Re: bill of attainder

Yes, it would be. Obama knows this.  

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